Prudential Securities Sued By Trustee

Suit Alleges Firm's Ties To New Era Enabled Charities Fraud

June 27, 1996|Bloomberg Business News

PHILADELPHIA — The trustee in the bankruptcy case of the Foundation for New Era Philanthropy sued Prudential Securities, demanding the return of tens of millions of dollars that passed through Prudential as part of an alleged Ponzi scheme.

The lawsuit doesn't charge Prudential directly with perpetrating the scheme. It charges that New Era's association with Prudential lent the ostensible foundation an air of legitimacy that helped New Era founder John Bennett defraud the charities. The suit also says Prudential knew or should have known Bennett was involved in fraud.

Trustee Arlin Adams, who is working to unwind one of the largest alleged frauds perpetrated against charities, said in the complaint that from 1989 to May 1995, $350 million passed through New Era accounts, including the Prudential account.

Prudential responded to the lawsuit in a news release, saying, "This account was handled appropriately, and we will vigorously defend ourselves against this groundless suit. We sympathize with the nonprofit institutions that lost money in the scheme, but their actions should be directed toward those responsible, the foundation and John Bennett."

According to the lawsuit, Prudential had suspicions about Bennett's use of the account as early as the summer of 1994, almost a year before Prudential forced New Era's bankruptcy filing in May 1995. Bennett had opened the account in October 1993.

By July 1994, the suit says, a Prudential vice president in the Kalamazoo, Mich., office, alerted to New Era's activities and promises by a colleague, became suspicious. According to the suit, Vice President George White told other Prudential officials that the account didn't "smell right" and questioned whether New Era wasn't "a classic Ponzi scheme."

Bennett promised to double the money put up by charities, religious groups and cultural institutions within six months.

Some groups did see their money doubled by Bennett, but when the alleged scheme collapsed, groups and donors were out more than $100 million.

In March 1995, Prudential's compliance department began an investigation into whether Bennett was using the account to "launder money," the suit says, but concluded the account was legitimate.

On April 27, 1995, the Securities and Exchange Commission told Prudential it was starting an investigation of the New Era account. The next day, Prudential froze the account.

Prudential had made transfers on Bennett's assurance that the funds were being matched in that bank account by anonymous donors and then forwarded to charities, the suit says.

The statements showed, however, that of the $89 million deposited in New Era's supposed grant account in March and April of last year, $87.5 million had come from wire transfers from Prudential and none had come from anonymous donors, the suit says.

When New Era's margin account was frozen, New Era owed Prudential $48.8 million; Prudential, however, held $61 million in New Era assets.

After the freeze on the account, Prudential continued to accept deposits of stock and cash. However, according to the lawsuit, although Prudential knew the deposits were made by donors who intended that the deposits be passed along to charities, Prudential took the deposits and used them to pay down its margin loan.